PIERCING THE PROVERBIAL CORPORATE VEIL

It is a common practice in The Bahamas when an owner of a company wants to ito hide behind the shield of confidentiality to protect his identity from the probing eyes of the public and also to conceal his business affairs he incorporates a company as a company to a certain extent offers anonymity. This is done by allowing the incorporating firm, be it a firm of lawyers, an accounting firm, trust company, bank or corporate managers, to use their personal as the nominee officers, directors and shareholders. The nominee shareholders will hold the issued shares of the company for and on behalf of the ultimate beneficial owner under a nominee agreement (sometimes referred to as a declaration of trust) and the nominee directors will take instructions from the ultimate beneficial owner with regard to the operation of the company.

A company is not just an association of human individuals – it is in law separate from them even though it must act through it shareholders or board of directors. The basic principle is that a company duly formed and registered is a separate legal entity and must be treated like any other independent person with its own rights and liabilities distinct from those of its shareholders. The distinction between a company and its shareholders is called “the veil of incorporation”. The “veil” is a metaphor used in law to describe the separation of the corporate entity from that of its owners, and refers to a situation where the judiciary or the legislature have decided that the separation of the personality of the company and that of its members/owner is not to be maintained. The veil of incorporation is said to be lifted.

Reece Chrpman

The corporate law concept of lifting or piercing the corporate veil describes a legal decision where an officer, director or shareholder of a company is held liable for the debts of the company, despite the general principle that those persons are immune from suits in contract or tort that otherwise would only hold the company liable. The leading case on the separate personality of a company as distinct from its members is Saloman v Saloman & Company Limited (1897) AC 22 HL. Notwithstanding the decision in Saloman there are certain situations where the courts have shown a willingness to lift the veil of incorporation and set aside the legal personality. There is no single guiding principle for their decisions and it is difficult to predict when the courts would lift the veil, but the main criteria should be when it is in the best interest of justice to do so.

The following are examples of where the veil of incorporation was lifted. In Jones v Lipman (1962) 1 All ER 442 Mr. Lipman contracted to sell his house to Mr. Jones. Having changed his mind he tried to avoid completion by conveying the house to a company that he owned and controlled. It was held that the transfer of the house to the company was a mere façade or a front as the company was being used to evade legal obligations and specific performance was ordered. In Giford Motor Co. Ltd v Horne (1933) Ch 935 Mr. Horne had contracted not to solicit the customers of Giford Motors when he left its employ. In breach of his promise on leaving the Company Mr. Horne set up a company to compete with and solicit the customers of Giford Motors. The veil was left to stop an attempt to prevent Horne from circumventing a restrictive covenant by hiding behind what was the described as a “cloak or sham.”

Similarly the veil of incorporation was lifted in Trustor AB v Smallbone (2001) 2 BCLC 436 Chancery Division because the company was a façade as it attempt to conceal the facts. this case involved a director of the company who transferred money from the company’s account directly to himself and to the account of another company controlled by him. The money was later used for his benefit. The most important aspect of this case was the decision dealing ewith the third proposition i.e. lifting the corporate veil in the interest of justice. Because of this case it is now unarguable that the veil can be lifted merely because justice demands it.

And lastly in Gencor v Dalby (2000) 2 BCLC 734 the veil was lifted because the company was the “alter ego” of Mr. Dalby. Also the courts have lifted the veil of incorporation where an agency exists as was the case in Re: F. G. Films Ltd (1953) 1 AER 615. The fact that the company is within a group may be another reason to lift the veil in order to identify the company within the group (DHN Food Distributors Ltd v Tower Hamlets LBC (1976) 3 AER 462).

This legal concept of piercing the corporate veil came to me this morning about 4:30 a.m. when I woke up thinking about what Mr. Duane Sands said about his contracts with the government and Mr. Reece Chipman-Dean’s (sometimes Reece Dean Chipman) statement in an attempt to rebut what Mr. Bradley Roberts said in a press statement exposing the scandal that is taking place with regard to an audit of the books of the Mortgage Corporation and also exposing the nexus between Mr. Chipman-Dean, the defeated FNM candidate for St. Thomas Moore and Mr. Kenyatta Gibson, the turncoat PLP candidate for the Kennedy constituency.

I have attempted to explain this legal concept as a layman in order that you may appreciate the concepts when all of the legal jargon is removed. You will recall that on the campaign trail Mr. Rodney Moncur revealed that Mr. Sands had contracts with the government and did not disclose his interests in those contracts prior to nominating as a candidate for the FNM in the Elizabeth bye-election within the constitutionally established time frame. Mr. Sands’ rebuttal was that he had transferred his shares in the company. I would speculate that this is similar to the Jones v Lipman scenario referred to earlier. Simply transferring the shares does not mean that he will not ultimately benefit from the contracts as the transferred shares more than likely are held under a nominee agreement in his favour. In essence then he has not divested himself of the shares; he has simply added a layer of confidentiality and the entire exercise of transferring the shares after the fact is a mere facade.

Mr. Chipman-Dean’s statement that he does not know Mr. Kenyatta Gibson, the Chairman of the Mortgage Corporation,

Kenyatta Gibson

is weak indeed, notwithstanding all of the press coverage he was given last year January when he crossed the floor of the House of Assembly. It is in my opinion very difficult for Mr. Chipman to justify that claim and obvious conflict of interest when Mr. Bradley Roberts plainly pointed out that “Mr. Gibson and Reece Dean Chipman have been partners in Braxton Wheels Limited which was incorporated on June 17th 2003. The Register Number of the Company is 50,759. The share capital was $5,000.00. The last returns showed that Kenyatta M Gibson holds 3,000 shares and is listed as President and Chairman of the Board of Directors and Reece Dean Chipman holds 2,000 shares and is listed as Managing Director and Vice-President.” .How can you not know your business partner?

Mr. Chipman-Dean attend, I presume Council meetings of the FNM and an announcement must have been announced in that forum and it is possible that Mr. Gibson was introduced to the Council. Again I would venture to speculate that this appears to be another Trustor v Smallbone scenario. It is possible that the Mortgage Corporation may have a policy that it does not award contracts for audit work to individuals and hence the establishment of Catsan & Chipman, the Gencor v Dalby principle. The Saloman principle could be possibly embodied in Mr. Gibson awarding the contract to his business partner, and indirectly to himself, seems to be more than just coincidence that that bid was the highest and from the least known company with the least amount of human resources. In both the cases of Mr. Sands and Mr. Chipman-Dean it is difficult to see how they can claim that they would not benefit from contracts awarded to their companies if they are the ultimate beneficial owners even though on the surface, at least in one case, the shares may be held under a nominee agreement.

I am not expert in this area – I leave that to the legal minds amongst us, nor do I claim to be the sharpest knife in the box. I will not draw any conclusions but will leave you to deduce, as a prudent or reasonable man, if my allegations are far fetched.